Cryptocurrencies are the talk of the town today. There is no purpose that you cannot do with a crypto token. You can make payments, serve different utilities, have fun, and even govern a cryptocurrency project if you hold a specific cryptocurrency. Many types of cryptocurrencies power various use cases.
In this article, we will discuss the types of crypto tokens, their purposes, and applications with the help of suitable examples.
What Are Cryptocurrencies?
Cryptocurrencies are the digital representation of real-world currencies. These coins are built with the help of cryptography, which ensures that no attempts at counterfeiting or duplicating the coins are made. Unlike fiat currencies, cryptocurrencies are decentralized assets and are recorded on a distributed ledger created by a network of computers.
Blockchain technology is the base of the cryptocurrency ecosystem. This technology initiates fast and secure transactions at a cheaper cost. However, there are also some demerits to cryptocurrencies that you should be aware of such as price volatility, high energy usage for its mining, and its potential use in criminal activities.
Types Of Cryptocurrencies
Based on their utility, cryptocurrencies are mainly divided into four types.
- Functional Tokens
- Investment Tokens
- Value-stable Tokens
- Unique Tokens
These tokens are again subdivided into various types. In this section, you will read in detail about these types of cryptocurrencies, their purposes and applications, and understand them with the help of suitable examples.
1️⃣Functional Tokens
As the name suggests, functional tokens take care of different functions that are expected to be fulfilled by cryptocurrencies. These tokens help in enhancing the utility and functions of decentralized financial institutions and augment the utilities of blockchain technology.
Functional tokens are further divided into the following types.
- Utility Tokens
Utility tokens are used to cater to specific use cases. They are launched on cryptocurrency exchanges and can be purchased in exchange for cryptocurrency or fiat currency. They are distributed as incentives to reward participation in a particular platform, completing tasks, or accessing special features. More than being an investment asset, utility tokens fulfill particular utilities or purposes. Some examples of utility tokens are Basic Attention Token (BAT), Ox (ZRX), Augur (REP), and Golem (GNT).
- Governance Tokens
Governance tokens help the token holders take part in the governance and decision-making procedure of a particular cryptocurrency project. Users can vote for major changes and upgrades on the platform. Governance tokens are mainly used in decentralized finance (DeFi) projects and decentralized autonomous organizations (DAOs). They decentralize the governance process and are used for both on-chain and off-chain decision-making. Maker (MKR) and Compound (COMP) are two examples of governance tokens.
- Exchange Tokens
Exchange tokens refer to cryptocurrency tokens created by a cryptocurrency exchange. Most often, they do not have a native blockchain and are built on other platforms such as Ethereum. They offer discounted trading fees and access to various perks and benefits for its users. Exchange tokens are closely tied to the exchange where it is listed. Its success and failure depend on the success and failure of the concerned exchange. Unlike governance tokens, exchange tokens do not entitle the users to any rights and cannot be used as a substitute for owning shares of a business. Examples of exchange tokens include Binance coins (BNB), UniSwap (UNI), OKB (OKB), etc.
- Asset-Backed Tokens
Asset-backed tokens are cryptocurrencies that are backed up by real-world assets such as real estate properties, precious metals like gold or silver, commodities, or even artworks. These are digital representations of valuable assets. As they are backed by valuable assets, these tokens are more stable and valuable than other types of cryptocurrencies. Investors holding asset-backed tokens can access high-value assets that are otherwise inaccessible to ordinary investors. You can use asset-backed tokens to complete cross-border payments and remittances by making use of blockchain technology. Tether (USDT), XRP, and Paxos Gold, (PAXG) are examples of asset-backed tokens.
2️⃣Investment Tokens
Investment tokens are cryptocurrencies that represent ownership rights on various projects, assets, and ventures. These tokens offer fractional ownership of real-world assets in the form of digital coins. Investment tokens link traditional markets to digital currencies and provide investment opportunities that are otherwise limited to accredited investors. Investment tokens are further divided into the following categories.
- Security Tokens
Security tokens represent ownership of real-world assets such as stocks, bonds, and real estate assets. The tokens are given value based on a process called tokenization of the assets. Security tokens, unlike other types of cryptocurrencies, are regulated by government organizations. With security tokens, investors can use digital assets to invest in real-world assets. Polymath (POLY) and tZERO are examples of security tokens.
- Equity Tokens
Equity tokens represent the tokenized versions of shares or equity of a company. It is a means of raising capital for companies and offers a means for an investor to own shares using their digital money. Equity tokens help investors navigate the shortcomings of traditional methods of capital raising such as bookkeeping and account maintenance, adherence to rules of stock exchanges, banks, and other financial institutions, etc. Neufund (NEU) and Swarm (SWM) are examples of equity tokens.
- Real Estate Investment Tokens
Real estate investment tokens represent the investor’s ownership of a real estate asset in terms of digital coins. Investors are thus given access to high-value real estate assets and can benefit from timely price appraisals. Such tokens facilitate investments in real estate markets all over the globe and provide liquidity and fractional ownership to investors. Examples of real estate investment tokens include Harbor Real Estate Tokens (HRET) and RealT Tokens.
- Venture Capital and Startup Investment Tokens
Venture capital and startup investment tokens represent ownership in venture capital funds, equity of startup companies, and other early-stage entrepreneurial ventures. These tokens facilitate tokenized ownership of funds, support fundraising campaigns, and enhance the liquidity of venture capital funds. SPiCE VC (SPICE) and Blockchain Capital (BCAP are examples of venture capital and startup investment tokens.
- Tokenized Funds and Index Tokens
Tokenized funds and index tokens represent an investment in various investment funds, asset portfolios, or indices. Access to a wide variety of fund types is available through a single fund. These tokens offer transparency and liquidity for digital asset portfolios. You can also access various investment strategies through tokenized funds and index tokens. PieDAO (DOUGH) and DeFi Pulse Index (DPI) are some examples of tokenized funds and index tokens.
- Commodity and Asset-Backed Tokens
These tokens are backed by real-world assets and physical commodities. These are a means of preserving the value of an asset or commodity and also help in creating a stable token. Commodity and asset-backed tokens enable digital ownership and real-world asset trading. Examples of commodity and asset-backed tokens include Paxos Gold (PAXG) and VeChain (VET).
3️⃣Value Stable Tokens
Value stable tokens are otherwise known as stablecoins. The value of the stablecoins is tied to any other valuable asset such as a strong fiat currency. Value stable tokens offer an apt solution for the high volatility and instability of cryptocurrencies.
Stablecoins are of three types: fiat-collateralized, crypto-collateralized, and non-collateralized (algorithmic). Fiat-collateralized stablecoins are tied to a fiat currency. Crypto-collateralized stablecoins are tied to another stable cryptocurrency. Non-collateralized stablecoins are pegged to any other currency. They are linked to software algorithms to automatically adjust the supply of the stablecoin based on demand.
Stablecoins have become an integral part of the cryptocurrency ecosystem and are now increasingly used for lending and purchasing goods and services.
4️⃣Unique Tokens
Unique tokens or non-fungible tokens (NFTs) are one-of-its-kind tokens that are unique and cannot be exchanged for any other tokens. It cannot be copied or replaced. However, NFT holders can trade them. They are unique, digital representations of real assets such as photos, artworks, movies, games, etc. Unlike normal cryptocurrencies or fiat currencies, NFTs stand different and identifiable from each other.
NFTs only provide ownership rights to their holders; they are not entitled to intellectual property rights or copyrights regarding the asset behind a particular NFT. NFTs are minted on blockchains and are validated before being finalized.
5️⃣Meme Coins
Meme coins are another major type of cryptocurrency that is in high demand now. Meme coins are digital currencies without any inherent value or utility. They are built based on viral memes. Memecoins leverage humor and satire and are empowered by dedicated communities. However, they lack any intrinsic value and cannot be relied on because of their high volatility. As they have limited utility, there is less chance that meme coins have a long lifespan. Most meme coins do not attain significant value in the market and perish soon after they are launched, while some coins such as Dogecoin, Shiba Inu, and Pepe Unchained are still highly valued in the market.
The Bottom Line
This article gives you a comprehensive overview of the different types of cryptocurrencies. A deep knowledge of the different types of cryptocurrencies and their utility will help you make informed decisions based on your needs and requirements.
